China ... Possible Rate Increase
- From: cnw <cnw@xxxxxxx>
- Date: Sun, 10 Sep 2006 18:44:05 +0800
China Signals Possible Rate Increase to Curb Growth (Update2)
By Nerys Avery and Yidi Zhao
Sept. 10 (Bloomberg) -- China's government will increasingly turn to monetary
policy to slow excessive investment, Vice Premier Zeng Peiyan said, signaling
that the central bank may raise the cost of borrowing and curb loans in the
fourth quarter.
``We'll use more economic policies, fewer administrative measures to control the
economy,'' Zeng said at the World Economic Forum's China Business Summit in
Beijing today. ``In the second half of the year, the central bank will work on
reducing liquidity in the banking system.''
Failure to curb China's investment boom may lead to overcapacity and rising bad
loans in the world's biggest maker of steel and mobile phones, the World Bank
says. Local governments are defying orders to slow spending, prompting Premier
Wen Jiabao to focus on curbing liquidity and raising the cost of borrowing.
``It's very important that China uses market-based measures'' to control the
economy, said Ha Jiming, chief economist at China International Capital Corp,
the nation's largest investment bank. ``You can always find ways to circumvent
administrative controls, but instruments such as interest rates and the exchange
rate are very difficult to get around.''
The world's fourth-largest economy grew 11.3 percent in the second quarter from
a year earlier, the fastest pace in more than a decade.
Factory Spending
Premier Wen has imposed a series of administrative orders since April to curb
local governments that approve projects such as factories and power plants that
account for almost 90 percent of fixed-asset spending. Urban investment in the
first seven months of the year climbed by 30.5 percent from a year earlier,
compared with 27.2 percent for the whole of last year.
``We'll have to continue to analyze our measures for macro- economic
adjustment,'' Wen said today at a meeting with European Union officials in
Helsinki. ``China's economy is now developing under macro-economic controls.''
Chinese officials at municipal councils and provincial governments often ignore
the central government's orders to cool investment as their career advancement
depends on economic expansion. State-owned banks including Bank of China Ltd.
are under pressure to bolster profits and stock prices after listing in Hong
Kong, making them less inclined to follow government lending guidelines.
``There is evidence that administrative measures, which fail to change the
underlying economic incentive structure, have only had short-lived success in
controlling investments, however decisively these measures are implemented
initially,'' Wang Qing, head of China strategy at Bank of America in Hong Kong,
wrote in a Sept. 7 research note.
Raising Borrowing Costs
The People's Bank of China raised borrowing costs by 0.27 percentage points in
April, the first increase in 18 months, and again by the same amount in August,
taking the benchmark one-year lending rate to 6.12 percent. The U.S. Federal
Reserve carried out 17 quarter-point increases in its overnight target rate in
the past two years, to 5.25 percent.
Since June, the central bank twice told lenders to increase the amount of
deposits they set aside as reserves, effectively reducing the amount of money
available for loans.
China's first-half economic growth of 10.9 percent ``is just about right, it's
not an economy that's overheating,'' Zhang Xiaoqiang, vice director of the
National Development Reform Commission, the government's top planning agency,
told the World Economic Forum's conference today. ``In the second half, China
will still concentrate on curbing bank loans.''
Awash With Cash
The banking system is awash with cash as a surging trade surplus, foreign
investment and capital inflows betting on a yuan appreciation pushed foreign
exchange reserves to a record $954.5 billion at the end of July, Vice President
Zeng Qinghong was quoted as saying last week.
The central bank hasn't taken enough of that money out of the financial system
by selling treasury bills, a process known as sterilization, which would leave
banks with less money to lend and raise banks' own borrowing costs in the
interbank market, according to economists.
Money supply at the end of July was 18.4 percent higher than a year earlier,
exceeding the central bank's target for the 14th straight month, while new yuan
lending in the first seven months was 2.35 trillion yuan ($296 billion), close
to the central bank's 2.5 trillion yuan target for the whole year.
``Monetary sterilization through both reserve requirement tightening and
open-market operations will have to remain aggressive,'' said Michael Kurtz, an
economist at Bear Stearns Asia Ltd. in Hong Kong.
New Jobs
China added 8.4 million new jobs in cities and small towns in the first eight
months of the year, Zeng said today.
That's about a third of the 25 million jobs that the government must create in
2006 for new graduates, migrant workers and employees fired by state-owned
companies, according to a target set in February by the development commission.
.
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